Costs first, tariffs later

Efficient electricity costs must be the basis for tariffs, says Chamber chief.

Knowing the true cost of producing electricity efficiently in Zambia is the first step on the road to cost-reflective tariffs, Chamber of Mines president, Nathan Chishimba, said today.

It is also the first step on the road to eventual reform of the Zambia power sector, which is currently under consideration by the government.

Chishimba’s remarks were contained in a statement released at a media conference held in Lusaka today (Wednesday 9 March 2017) on the challenges and opportunities facing the power sector, and how these are likely to affect the economy.

“At present, the cost of producing electricity in Zambia is not known, as the last study done for ZESCO was ten years ago, in 2007. However, a new study, funded by the African Development Bank, is expected to commence in the course of 2017.”

Chishimba said it was “absolutely crucial” that the findings of this study be the basis for both tariff reform and sector reform.

“Zambia needs a revitalised, reformed power sector able to deliver cost-efficient, competitively priced electricity to grow the economy, employment and disposable incomes,” said Chishimba. “Bringing this about is a mammoth strategic task whose effects with be felt decades from now. It must be done properly.”

Chishimba said the idea that tariffs should be based on the known cost of producing electricity efficiently was one shared by Finance Minister Felix Mutati. “It’s worth recalling that the Honourable minister said in his 2017 national budget speech that cost-reflective tariffs do not mean ‘consumers should end up paying for inefficiency’.”

Chishimba said the idea of reforming the power sector was also increasingly accepted, not just by government but by the Energy Regulation Board itself.

“Minister Mutati said in his 2017 national budget speech that government would conduct a review of the overall structure, governance and operations of the electricity sector, including generation, transmission and distribution. And the Energy Regulation Board issued a paper in 2016 discussing the pros and cons of various reform options in developing countries like Zambia.”

Illustrating the concern the mining industry and other stakeholders have about electricity costs, Chishimba revealed that proposed electricity tariffs at Zambia’s newest power projects are more than 20% above global benchmarks established by the US Energy Information Administration.

“What this suggests is that Zambia’s electricity is not being produced efficiently by global standards, or there is a lack of transparency around the way in which tariffs are calculated,” Chishimba said.

“For new sources of electricity to facilitate economic development and power Zambian homes, it has to be competitively priced. Electricity that users cannot afford is little better than having no electricity at all.”

Competitively priced electricity is all the more important in a developing country like Zambia, because industry needs to generate “much-needed employment”, and households need the affordable power that helps to fuel the growth of the middle class, a key barometer of social progress.

Chishimba said that the mining industry has never shied away from the reality of cost-reflective tariffs. “We are business people, after all, and costs are something we deal with every single day at our mines. We are fully committed to tariffs that reflect the cost of providing electricity in an efficient, transparent and internationally competitive manner.”